Avoid These Life Insurance Payout Surprises

Life insurance: You rely on it to help your loved ones cover certain expenses upon your death. And you trust that it will work as planned. But does it?

Consider the following scenario.

You pay premiums for the life insurance policy for decades, and then, when it is time to collect, your heirs find that there is a problem. They don’t get paid, or they don’t get paid what they expected.

It sounds impossible, but it can happen.

For example, consider a couple who has been married for decades. The husband has a life insurance policy that will pay his wife if he dies first. When the couple divorce later in life, they agree to keep the wife as the beneficiary. She creates a financial plan with this in mind, thinking she will collect if the husband dies.

But when the husband passes away, that doesn’t happen. The life insurance company tells her that her rights as the beneficiary were revoked as a result of the divorce.

That’s right. In some states, the law nullifies upon divorce the designation of a spouse as a beneficiary of non-probate assets such as life insurance policies.

Some people assume the opposite – that divorce automatically divests a former spouse of life insurance beneficiary status. A husband may assume his ex-wife isn’t getting a penny of his money when he dies, and that is what he wants. But that’s not always the case either. In many states, a beneficiary has to be changed by the policy owner. It doesn’t happen automatically, even in the case of divorce.

From these examples, we can see that it’s a good idea to read your life insurance policy to understand the terms of the payoff.

Know your state laws and clarify your intentions so there are no surprises when it’s time for your loved ones to collect on your policy.

Our office can work with you to ensure your policy is set up appropriately. Contact us to review your current coverage or to establish a new policy that will effectively meet your future needs.